Question 1

Which of the generally accepted auditing standards of reporting would not normally apply to special reports such as cash basis statements?
A) First standard.
B) Second standard.
C) Third standard.
D) Fourth standard.

Accepted Answer

The answer of Which of the generally accepted auditing standards...

Question 2

An engagement to express an opinion on a system of internal control will generally
A) Only require those procedures already applied in assessing control risk during a financial statement audit.
B) Increase the reliability of the financial statements that have already been audited.
C) Be more extensive in scope than the assessment of control risk made during a financial statement audit.
D) Be more limited in scope than the assessment of control risk made during a financial statement audit.

Accepted Answer

An engagement to express an opinion on a system of internal control will generally be more extensive in scope than the assessment of control risk made during a financial statement audit. This is because the objective of the engagement is to provide an independent opinion on the effectiveness of the client's internal controls, rather than just assessing the risks associated with the financial statements. The engagement will typically require additional procedures to evaluate the design and operating effectiveness of the internal controls, and may also include testing and analysis of various control activities.

Question 3

When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should
A) Be titled so that the financial statements are not confused with statements prepared to conform to generally accepted accounting principles.
B) Disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards.
C) Not express an opinion on whether the statements are presented in conformity with the basis of accounting used.
D) Include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting.

Accepted Answer

The auditor's report should be titled to clearly indicate that the financial statements are prepared on an income tax basis, distinguishing them from GAAP-based statements.

Question 4

An auditor may reasonably issue an "except for" qualified opinion for
A) A scope limitation or an unjustified accounting change.
B) A scope limitation, but not an unjustified accounting change.
C) An unjustified accounting change, but not a scope limitation.
D) Neither an unjustified accounting change nor a scope limitation.

Accepted Answer

An auditor may issue an "except for" qualified opinion for a scope limitation or an unjustified accounting change. This is because these situations affect the overall fairness of the financial statements and the auditor cannot provide an unqualified opinion without the necessary information or compliance with accounting principles.

Question 5

When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to
A) Prepare prospective financial information to verify whether management's plans can be effectively implemented.
B) Project future conditions and events for a period of time not to exceed one year following the date of the financial statements.
C) Issue a qualified or adverse opinion, depending upon materiality, because of the possible effects on the financial statements.
D) Consider the adequacy of disclosure about the entity's possible inability to continue as a going concern.

Accepted Answer

When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to consider the adequacy of disclosure about the entity's possible inability to continue as a going concern. This means that the auditor should assess whether the financial statements include sufficient and appropriate disclosures related to the entity's ability to continue operating as a going concern. The auditor should also evaluate management's plans to alleviate the going concern issue and consider the likelihood of success of those plans. The auditor may need to modify the audit report to include an emphasis-of-matter paragraph or an explanatory paragraph to draw attention to the disclosure about the entity's possible inability to continue as a going concern. However, the auditor should not prepare prospective financial information or project future conditions and events. Additionally, a qualified or adverse opinion would only be necessary if the auditor believes that the financial statements are materially misstated due to inadequate disclosure about the entity's going concern situation.

Question 6

What is an auditor's responsibility for supplementary information, such as segment information, that is outside the basic financial statements, but required by the FASB?
A) The auditor has no responsibility for required supplementary information as long as it is outside the basic financial statements.
B) The auditor's only responsibility for required supplementary information is to assist in preparing the supplementary information.
C) The auditor is required to read the other information and consider whether such information is consistent with the information in the financial statements.
D) The auditor should apply tests of details of transactions and balances to the required supplementary information and report any material misstatements in such information.

Accepted Answer

The auditor is responsible for reading the supplementary information and considering whether it is consistent with the financial statements. However, the auditor is not required to apply tests to the supplementary information or report any misstatements in it.

Question 7

Comparative financial statements include the financial statements of a prior period that were examined by a predecessor auditor whose report is not presented. If the predecessor auditor's report was qualified, the successor auditor must
A) Obtain written approval from the predecessor auditor to include the prior year's financial statements.
B) Issue a standard comparative audit report indicating the division of responsibility.
C) Express an opinion on the current year statements alone and make no reference to the prior year statements.
D) Disclose the reasons for any qualification in the predecessor auditor's opinion.

Accepted Answer

The successor auditor must disclose the reasons for any qualification in the predecessor auditor's opinion to provide full transparency and context for the users of the financial statements.

Question 8

All of the following are true with respect to the auditor's consideration of information other than the audited financial statements that are included in an entity's annual report except:
A) The auditor is under no obligation to perform audit procedures on this other information.
B) The auditor must consider whether the other information is consistent with the information contained in the audited financial statements.
C) The auditor must request that material inconsistencies be corrected.
D) The auditor must perform audit procedures on this other information.

Accepted Answer

The statement "The auditor must perform audit procedures on this other information" is not true. While the auditor must consider whether the other information is consistent with the audited financial statements and request that material inconsistencies be corrected, they are not required to perform additional audit procedures on this other information.

Question 9

An auditor's report on financial statements prepared in accordance with a basis of accounting other than generally accepted accounting principles should include all of the following except:
A) An opinion as to whether the basis of accounting used is appropriate under the circumstances.
B) An opinion as to whether the financial statements are presented fairly in conformity with the other basis of accounting.
C) Reference to the note to the financial statements that describes the basis of presentation.
D) A statement that the basis of presentation is a basis of accounting other than generally accepted accounting principles.

Accepted Answer

An auditor's report on financial statements prepared in accordance with a basis of accounting other than generally accepted accounting principles should include an opinion as to whether the financial statements are presented fairly in conformity with the other basis of accounting (option B), a reference to the note to the financial statements that describes the basis of presentation (option C), and a statement that the basis of presentation is a basis of accounting other than generally accepted accounting principles (option D). Option A is incorrect because the auditor should express an opinion on whether the financial statements are presented fairly in conformity with the other basis of accounting, not on whether the basis of accounting used is appropriate under the circumstances.

Question 10

When reporting on comparative financial statements where the financial statements of the prior year have been examined by a predecessor auditor whose report is not presented, the successor auditor should make
A) No reference to the predecessor auditor.
B) Reference to the predecessor auditor only if the predecessor auditor expressed a qualified opinion.
C) Reference to the predecessor auditor only if the predecessor auditor expressed an unqualified/unmodified opinion.
D) Reference to the predecessor auditor regardless of the type of opinion expressed by the predecessor auditor.

Accepted Answer

The successor auditor should always make a reference to the predecessor auditor regardless of the type of opinion expressed by the predecessor auditor, as this information is important to the users of the financial statements to understand the continuity of the audit process and any issues raised by the previous auditor.

Question 11

If a public company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(an)
A) Disclaimer of opinion.
B) Qualified opinion.
C) Review report.
D) Unqualified opinion with a separate explanatory paragraph.

Accepted Answer

A qualified opinion is appropriate when financial statements are presented fairly except for a specific issue, such as the omission of the statement of cash flows.

Question 12

The auditor's best course of action with respect to "other financial information" included in an annual report containing the auditor's report is to
A) Indicate in the auditor's report that the "other financial information" is unaudited.
B) Consider whether the "other financial information" is accurate by performing a limited review.
C) Obtain written representations from management as to the material accuracy of the "other financial information."
D) Read and consider the manner of presentation of the "other financial information."

Accepted Answer

The auditor's best course of action with respect to "other financial information" included in an annual report containing the auditor's report is to read and consider the manner of presentation of the "other financial information." The auditor is not required to audit or review the "other financial information" and may not provide any assurance on its accuracy. However, the auditor should consider whether the "other financial information" appears to be materially inconsistent with the audited financial statements or involves a misstatement of fact. The auditor should also consider the auditor's responsibility paragraph in the auditor's report, which states that the auditor's responsibility is to express an opinion on the financial statements, and not on the "other financial information" included in the annual report.

Question 13

When audited financial statements are presented in a document containing other information, the auditor
A) Has an obligation to perform auditing procedures to corroborate the other information.
B) Is required to issue an "except for" qualified opinion if the other information has a material misstatement of fact.
C) Should read the other information to consider whether it is inconsistent with the audited financial statements.
D) Has no responsibility for the other information because it is not part of the basic financial statements.

Accepted Answer

Auditing standards require auditors to read the other information to consider whether it is consistent with the audited financial statements. If auditors identify material inconsistencies, they should address them in the report. However, auditors are not required to perform additional auditing procedures to corroborate the other information unless they choose to do so. Auditors are not responsible for the content of the other information, but they must ensure that the presentation of the audited financial statements and the other information as a whole is not misleading.

Question 14

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's financial statements adequately disclose its financial difficulties, the auditor's report is required to include an explanatory/emphasis-of-matter paragraph that specifically uses the phrase(s)
A) "Reasonable period of time, not to exceed one year" and "going concern."
B) "Reasonable period of time, not to exceed one year" but not "going concern."
C) "Going concern" but not "reasonable period of time, not to exceed one year."
D) Neither "going concern" nor "reasonable period of time, not to exceed one year."

Accepted Answer

The phrase "going concern" is required when the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern. The phrase "reasonable period of time, not to exceed one year" is not required by professional auditing standards, but if it is used it can help to clarify the auditor's opinion. However, since the question states that the entity's financial statements adequately disclose its financial difficulties, it is not necessary to add the phrase "reasonable period of time, not to exceed one year" in the auditor's report. Therefore, choice C is the best option.

Question 15

A CPA who is not independent and is associated with financial statements should disclaim an opinion with respect to those financial statements. The disclaimer should
A) Clearly state the specific reasons for lack of independence.
B) Not mention any reason for the disclaimer other than that the CPA was unable to conduct the examination in accordance with generally accepted auditing standards.
C) Not describe the reason for lack of independence but should state specifically that the CPA is not independent.
D) Include a middle paragraph clearly describing the CPA's association with the entity and explaining why the CPA was unable to gather sufficient appropriate evidential matter to warrant the expression of an opinion.

Accepted Answer

A disclaimer of opinion should clearly state that the CPA is not independent, but it should not provide any specific reasons for the lack of independence. The disclaimer should only state that the CPA is not able to express an opinion on the financial statements. Providing specific reasons could potentially provide misleading information to users of the financial statements.

Question 16

When expressing an opinion on a specified account or item in the financial statements, the auditor need only consider that account or item. However, the auditor must have audited the entire set of financial statements if this engagement requires a report on the entity's
A) Net income.
B) Retained earnings.
C) Assets.
D) Working capital.

Accepted Answer

The answer of When expressing an opinion on a specified...

Question 17

Auditing standards define special purpose financial statements as including those prepared under the following base(s)
A) Regulatory basis.
B) Tax basis.
C) Contractual basis.
D) All of these.

Accepted Answer

Auditing standards define special purpose financial statements as including those prepared under regulatory, tax, or contractual bases. Therefore, all of the choices A, B and C are correct, making D the best choice.

Question 18

When audited financial statements are presented in an entity's document containing other information, the auditor should
A) Perform inquiry and analytical procedures to ascertain whether the other information is reasonable.
B) Add an explanatory paragraph to the auditor's report without changing the opinion on the financial statements.
C) Perform the appropriate substantive auditing procedures to corroborate the other information.
D) Read the other information to determine that it is consistent with the audited financial statements.

Accepted Answer

The auditor is required to read the other information to ensure it is consistent with the audited financial statements, but not to perform additional procedures unless inconsistencies are found.

Question 19

When are an auditor's reporting responsibilities not met by attaching an explanation of the circumstances and a disclaimer of opinion to the entity's financial statement?
A) When the auditor believes the financial statements are misleading.
B) When the auditor was unable to observe the taking of the physical inventory.
C) When the auditor is uncertain about the outcome of a material uncertainty.
D) When the auditor has performed insufficient auditing procedures to express an opinion.

Accepted Answer

Attaching an explanation of the circumstances and a disclaimer of opinion is not sufficient if the auditor believes that the financial statements are misleading, as this would still not provide users with reliable information. In such a case, the auditor must issue a qualified opinion or an adverse opinion, depending on the nature and extent of the misstatements.

Question 20

Which of the following would not require an explanatory/emphasis-of-matter paragraph in the auditor's report?
A) Additional emphasis.
B) Lack of consistency in the financial statements due to accounting changes.
C) Going concern.
D) Opinion based in part on the report of another auditor.

Accepted Answer

Option D would not require an explanatory/emphasis-of-matter paragraph as it is a standard reporting requirement when the auditor relies on the report of another auditor. Options A, B, and C would require an explanatory or emphasis-of-matter paragraph as they relate to significant matters that may affect the user's understanding of the financial statements.

Quiz 18: Reports on Audited Financial Statements

Which of the generally accepted auditing standards of reporting would not normally apply to special reports such as cash basis statements?

An engagement to express an opinion on a system of internal control will generally

When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should

An auditor may reasonably issue an "except for" qualified opinion for

When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to

What is an auditor's responsibility for supplementary information, such as segment information, that is outside the basic financial statements, but required by the FASB?

Comparative financial statements include the financial statements of a prior period that were examined by a predecessor auditor whose report is not presented. If the predecessor auditor's report was qualified, the successor auditor must

All of the following are true with respect to the auditor's consideration of information other than the audited financial statements that are included in an entity's annual report except:

An auditor's report on financial statements prepared in accordance with a basis of accounting other than generally accepted accounting principles should include all of the following except:

When reporting on comparative financial statements where the financial statements of the prior year have been examined by a predecessor auditor whose report is not presented, the successor auditor should make

If a public company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(an)

The auditor's best course of action with respect to "other financial information" included in an annual report containing the auditor's report is to

When audited financial statements are presented in a document containing other information, the auditor

A CPA who is not independent and is associated with financial statements should disclaim an opinion with respect to those financial statements. The disclaimer should

When expressing an opinion on a specified account or item in the financial statements, the auditor need only consider that account or item. However, the auditor must have audited the entire set of financial statements if this engagement requires a report on the entity's

Auditing standards define special purpose financial statements as including those prepared under the following base(s)

When audited financial statements are presented in an entity's document containing other information, the auditor should

When are an auditor's reporting responsibilities not met by attaching an explanation of the circumstances and a disclaimer of opinion to the entity's financial statement?

Which of the following would not require an explanatory/emphasis-of-matter paragraph in the auditor's report?